We all know that forex trading can be tricky to begin, but finding the right forex strategies to trade with is the key for beginner traders entering the forex market.
The forex market is the largest and most liquid financial market in the world. With an average daily trading volume of $6.6 trillion, more than double that of the New York Stock Exchange, making it an attractive arena for traders.
Trading currencies can be a rewarding endeavor for those who are willing to take on the risk. However, there are many pitfalls that beginners should avoid if they want to succeed long term.
That means finding the right trading style!
Continue reading to discover forex trading strategies that work and gain some insights into what you need to do as a beginner trader to be successful in the forex market. But first, understand exactly what a forex trading strategy is and how to choose the right one for you.
What is a forex trading strategy?
A trading strategy could be described as a set of rules that help a trader determine when to enter a trade, how to manage it, and when to close it. A trading strategy can be very simple or very complex – it varies from trader to trader.
Traders using technical analysis will find it easier to define their entry/exit rules, while traders utilizing fundamental analysis might find it a bit more difficult as more discretion is involved. Regardless of that, every trader should have a strategy prepared, as this is the best way to achieve consistency and help you measure your performance accurately.
How to choose the best forex strategy?
Very few traders find the right forex strategy straight away. The majority will spend a significant amount of time testing various strategies with a demo trading account and/or backtesting. This allows you to conduct your tests in a safe and risk-free environment.
Even if a trader gets to the point where they find a strategy that has promising results and feels right, it is unlikely that they will stick with that exact strategy for an extended period. The financial markets are evolving constantly, and traders must evolve with them.
If you are a beginner, sticking with simple strategies might be preferable. Many beginners make the mistake of trying to incorporate too many technical indicators into their strategy, which leads to information overload and conflicting signals. You can always tweak your strategy as you go and use the experience you learned from backtesting and demo trading.
Most commonly used forex trading strategies for beginners
See our list of 12 effective forex trading strategies for beginners below:
- Price action trading
Price action trading is a strategy that focuses on making decisions based on the price movements of a certain instrument instead of incorporating technical indicators (e.g. RSI, MACD, Bollinger Bands). There is a variety of price action strategies you could utilize – from breakouts and reversals to simple and advanced candlestick patterns.
Technical indicators generally are not part of a price action strategy, but if they are incorporated they should not play a large role in it but rather be used as a supporting tool. Some traders like to incorporate simple indicators such as moving averages as they can help identify the trend.
The benefits of price action trading are that your charts remain clean, and there is less risk of suffering from information overload. Having multiple indicators on your chart can send conflicting signals, which can lead to confusion, especially for beginners.
Reading the price action can also give you a better feeling for the market and help you identify patterns more efficiently. Another reason price action trading is especially popular amongst day traders is that it is more suitable for traders looking to profit from short-term movements. With day trading, you need to make decisions quickly, and having a “clean chart” and focusing purely on the price action will make this process easier.
- Range trading strategy
Traders utilizing a range trading strategy will look for trading instruments that are consolidating in a certain range. Depending on the timeframe you are trading on, this range could be anything from 20 pips to several hundred pips. What the trader is looking for is consistent support and resistance areas that are holding – i.e. price bouncing off the support area and the price being rejected at the resistance area.
Traders using this strategy must look for trading instruments that are not trending. To do so, you may simply look at the price action of the instrument, or use indicators such as the moving average and the average direction index (ADX). The lower the ADX value, the weaker the trend.
After you have found a suitable trading instrument, you must identify the range that the trading instrument is consolidating within.
A classic range trading strategy will tell you to sell when the price hits the area of key resistance and buy when the price hits the area of key support. Some traders will focus on two particular levels, while others will trade “bands” or “areas” – for example, if you identified 1.17 as the key resistance level but the price often stalls at 1.1690 or 1.1695, you can highlight that area (1.1690 – 1.17) and start looking for selling opportunities within it. Only focusing on that particular level might mean you will lose out on good trading opportunities, as prices can often reverse before hitting it.
- Trend trading strategy
Trend trading strategies involve identifying trade opportunities in the direction of the trend. The idea behind it is that the trading instrument will continue to move in the same direction as it is currently trending (up or down).
When prices are consistently rising (posting higher highs), we are talking about an uptrend. Vice-versa, declining prices (the trading instrument is making lower lows) will indicate a downtrend.
Except when looking at the price action, traders can use supporting tools to identify the trend. Moving averages are one of the most popular ones. Traders might simply look at whether the price is trading above or below a moving average (the 200 DMA is a popular and widely watched one) or use MA crossovers.
To use moving average crossovers (which can also be used as entry signals), you will have to set a fast MA and a slow MA. One popular example is the 50 DMA and the 200 DMA. The 50-day moving average crossing above the 200-day moving average could indicate the beginning of an uptrend, and vice-versa.
- Position trading
The goal of position trading is to capture profits from long-term trend moves while ignoring the short-term noise occurring day to day. Traders that utilize this type of trading style might hold positions open for weeks, months, and in rare cases – even years.
Along with scalping, it is one of the more difficult trading styles. It requires a trader to remain highly disciplined, able to ignore the noise, and remain calm even when a position moves against them for several hundred pips.
Imagine for example, that you had a bearish outlook on stocks in early 2018. You shorted the S&P 500 at the beginning of the year, to keep the position open for the rest of the year. While you would have enjoyed the price movements at the beginning and the end of the year, the rally from March to September could have been a painful experience. Only a few traders have the discipline to keep their positions running for such a long period.
- Day trading strategy
Day traders usually do not hold trades only for seconds, as scalpers do. However, their trading day also tends to be focused on a specific session or time of the day, when they try to act on opportunities. While scalpers might use an M1 chart to trade, day traders tend to use anything from the M15 up to the H1 chart.
Scalpers tend to open more than 10 trades per day (some highly active traders might end up with even more than 100 per day), while day traders usually take it a bit slower and try to find 2-3 good opportunities per day.
Day trading could suit you well if you like to close your positions before the trading day ends but do not want to have the high level of pressure that comes with scalping.
- Scalping strategy
When scalping, traders are trying to take advantage of small intraday price moves. Some even have a target of only 5 pips per trade, and the trade duration could vary from seconds to a few minutes. Scalpers need to be good with numbers and be able to make decisions quickly, even when under pressure. They also usually spend more time in front of the screen and tend to focus on one or a few specific markets (e.g. only scalping EUR/USD or only S&P 500 futures).
The advantage of being a scalper is that it allows you to focus on the market in a specific timeframe, and you do not have to worry about holding your positions overnight or interpreting long-term fundamentals.
However, scalping comes with a lot of pressure as you need to be fully focused during your trading session. Furthermore, it is easier to make mistakes and react emotionally when your trades are running only for minutes. It may therefore not be the best trading style for beginners to start with.
- Swing trading
Swing trading is a term used for traders who tend to hold their positions open for multiple days. They might use anything from a H1 to a D1 chart, or even weekly. Popular trading strategies include trend following, range trading, or breakout trading.
Traders who choose this type of trading style need patience and discipline. It might take days for a quality opportunity to show up, or you might end up holding a trade open for a week or more while running an open loss. Some traders do not have the necessary patience and close their trades too early.
If you like to analyze the markets without any rush and are comfortable with running positions for days or even weeks – swing trading might be the right trading style for you. It also allows you to include fundamental analysis (trying to anticipate monetary policy moves or political developments) – which is futile to do when scalp trading.
How to compare forex strategies?
Each trader should try to identify their edge. This might be a set of skills that the trader possesses.
For example, some traders might have a short attention span but are quick with numbers and can handle the stress of intraday trading extremely well. Whereas a trader with a different trading style may not be able to function efficiently in this kind of environment, but could instead be a skilled strategist who can always keep sight of the bigger picture.
For beginner traders, it is especially important to identify what skills they may have and tailor the trading strategy according to each individual’s personality, not the other way around. There are many benefits of forex trading so it’s up to you to compare the strategies which may be better suited.